Red Lobster 'Bankruptcy' Scare: CFO Blames Unlimited Shrimp Deal, Pricey Labour and Leases

Facing mounting debt and declining sales, Red Lobster mulls Chapter 11 bankruptcy. The seafood chain reportedly seeks a Chapter 11 filing to shed burdensome contracts and negotiate more favourable lease terms.

Squeezed by unfavourable leases and labour costs, Red Lobster seeks help from King & Spalding, a commercial law firm, to restructure and reduce expenses. In a desperate bid to reverse declining sales in 2023, Red Lobster launched an "all-you-can-eat shrimp" promotion.

However, the CFO partly blamed the record £8 million ($11 million) loss on this overly generous offer, highlighting the company's financial struggles. Founded in 1968 with a single location in Lakeland, Florida, Red Lobster has grown to a national chain with roughly 650 restaurants across the United States, all famous for their cheddar bay biscuits.

While a final decision wasn't made, sources told Bloomberg that Red Lobster was considering Chapter 11 bankruptcy to remain operational during restructuring. This could involve renegotiating leases and shedding unfavourable contracts.

Red Lobster's Popular Shrimp Deal Backfires

The shrimp promotion was part of the restaurant's desperate attempt to attract more customers and reverse losses of £4.35 million ($5.4 million) in the second quarter of 2023. However, the strategy backfired as the generous offer proved unsustainable, contributing to a record £8.86 million ($11 million) loss for the company.

Red Lobster is one of many retailers that use this tactic to attract more customers. However, the Endless Lobster Experience was introduced at a tumultuous time. The Florida-based chain grappled with a record £10 million ($12.5 million) operating loss in the fourth quarter of 2023, raising questions about the promotion's long-term viability.

The $20 "Endless Shrimp" offer, initially a limited-time special, became a permanent menu fixture in June. This move, however, proved counterproductive. While foot traffic did increase by 4 percent, the all-you-can-eat deal's low price point resulted in unsustainable costs, contributing to Red Lobster's financial woes.

The offer's popularity exceeded Red Lobster's expectations, likely fueled by social media buzz on platforms like TikTok. Intending to maximise their value, diners shared videos showcasing their consumption, further amplifying the promotion's reach.

"For those who have been in the US recently, $20 was very cheap. And the rationale for this promotion was to say we knew the price was cheap, but the idea was to bring more traffic in the restaurants," CFO Ludovic Garnier said in November.

"But something which was different from our expectation is the proportion of the people selecting these promotions was much higher compared to expectation," the top executive added. To recoup some of the financial losses, Red Lobster eventually raised the price of the "Endless Shrimp" offer to £20 ($25).

Red Lobster's ownership has changed hands in recent years. Previously under the Darden Restaurants group (which also includes Olive Garden), the company was acquired by Golden Gate Capital in 2014.

In 2020, Thai Union acquired Red Lobster. However, Thai Union announced this year that the company's "financial needs" no longer align with their investment goals, hinting at a potential exit.

Running a successful restaurant requires a delicate balance. Beyond just managing staff, owners must constantly innovate and adapt to attract customers in a competitive market. However, these efforts can be risky.

Some restaurants, like Sansan Ramen in Queens, have experimented with using virtual greeters or servers to enhance the customer experience. However, managing a restaurant also comes with its challenges.

There have been instances of employee misconduct, such as the reported case at Wendy's, where a staff member allegedly created a fake employee to collect extra pay.